The concept of “small company” has been introduced for the first time in the Companies Act, 2013. Here we take a look at the definition and what relaxations has been afforded to a small company under the Companies Act, 2013.
Section 2(85) defines a Small company as
‘‘small company’’ means a company, other than a public company,—
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or
(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:
Provided that nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;
As can be seen it is a very complicated definition. In the first sentence itself a public company has been removed from the definition of a small company. Therefore a public company with 7 shareholders and minimum of Rs.5 lakhs share capital will not be considered as a “Small Company”
Secondly the proviso states that a Private company which is a holding company or a subsidiary company will also not be considered as a “Small Company”. Public Company has anyway been eliminated from the definition of a Small Company so the proviso (A) applies only to a private company which is a holding or subsidiary company. In case of subsidiary private company, it obviously means subsidiary to another private company because a private company which is subsidiary to a public company is considered as a public company as per the definition of “public company” in section 2(71) of the Act.
Coming back to the definition of Small Company, any company which has a paid up share capital of not exceeding Rs.50 lakhs or such higher amount as may be prescribed but not exceeding Rs.5 crores OR turnover as per last profit and loss account which does not exceed Rs.2 crores or such higher amount as may be prescribed but does not exceed Rs.20 crores. So the criteria for inclusion of a company as a small company is on the dual basis of either paid up share capital or turnover as per last profit & loss account. So if the company breaches any one limit, it goes out of the ambit of Small Company, for eg. if the paid up share capital is only Rs.25 lakhs but if the turnover goes to Rs.2.5 crores then it automatically gets struck off as a Small Company. A piquant situation could arise whether the company could yo-yo from Small Company to Non-Small Company on a yearly basis if the turnover keeps fluctuating below and above the limits.
Now let us look at what are the benefits of being a small company under the companies act, 2013
Section 2(40) defines “Financial Statement”. The exemption given to a Small Company is that a Financial Statement need not include Cash Flow statement for the financial year.
2(40) “financial statement” in relation to a company, includes—
(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) to sub-clause (iv):
Provided that the financial statement, with respect to One Person Company, small company and dormant company, may not include the cash flow statement;
The next reference to small company is in Proviso to Section 92(1) of the Companies Act, 2013. It provides that the annual return of a small company can be signed by a Company Secretary or where there is no Company Secretary by the Director of a company. It is a very surprising provision because Small Companies are not required to appoint Company Secretary who are included in the definition of Key Managerial Personnel as per section 2(51) of the Act. The limits of Key Managerial Personnel are to be found in Draft Rule 13.6 which stipulates that every listed company and every other company with a paid up share capital of Rs.5 crores shall appoint a Key Managerial Personnel. So where is the necessity for a Small Company to appoint a Key Managerial Personnel in the form of Company Secretary. So basically it means the annual return of a Small Company should be signed by a Director of the company. Hitherto companies which had paid up share capital exceeding Rs.10 lakhs were required to submit a Compliance Certificate as per Section 383A of the Companies Act, 1956. The concept of Compliance Certificate which was originally for companies with share capital between Rs.10 lakhs to Rs.50 lakhs but later the upper limits were enhanced, first to Rs.2 crores, then to Rs.3 crores and now to Rs.5 crores. The Compliance Certification system brought about a lot of compliance discipline in the small companies because by force of law, small companies were required to maintain statutory registers, minutes books, and properly comply with all the rules and regulations governing a corporate entity in India. Unfortunately with the removal of Compliance Certificate and the requirement that the annual return of a small company need be effectively signed by a Director, all that compliance system which was so meticulously infused in small companies will simply fall by the way side. So much for an economy which seeks to move up the economic ladder of developing nations and aspires to be a super power in the near future!!!
The provisions of section 92(1) are as follows:
92. (1) Every company shall prepare a return (hereinafter referred to as the annual return) in the prescribed form containing the particulars as they stood on the close of the financial year regarding—
(a) its registered office, principal business activities, particulars of its holding, subsidiary and associate companies;
(b) its shares, debentures and other securities and shareholding pattern;
(c) its indebtedness;
(d) its members and debenture-holders along with changes therein since the close of the previous financial year;
(e) its promoters, directors, key managerial personnel along with changes therein since the close of the previous financial year;
(f) meetings of members or a class thereof, Board and its various committees along with attendance details;
(g) remuneration of directors and key managerial personnel;
(h) penalty or punishment imposed on the company, its directors or officers and details of compounding of offences and appeals made against such penalty or punishment;
(i) matters relating to certification of compliances, disclosures as may be prescribed;
(j) details, as may be prescribed, in respect of shares held by or on behalf of the Foreign Institutional Investors indicating their names, addresses, countries of incorporation, registration and percentage of shareholding held by them; and
(k) such other matters as may be prescribed,
and signed by a director and the company secretary, or where there is no company secretary, by a company secretary in practice:
Provided that in relation to One Person Company and small company, the annual return shall be signed by the company secretary, or where there is no company secretary, by the director of the company.
The next mention of Small Company is to be found in Section 173 relating to Meetings of Board of Directors and the requirement of holding at least four Board meetings in a year and the gap between two Board meetings not to be more than 120 days. Section 173(5) specifies that Small Company need hold only one Board meeting in each half of a calendar year and the gap between two Board meeting is not less than 90 days.
Remember that for Normal Companies the gap between two Board meetings should be not more than 120 days whereas for Small Companies the gap between two Board meetings should be not less than 90 days. Which means basically there should be a three month gap between two Board meetings of a Small Company.
173 (5) A One Person Company, small company and dormant company shall be deemed to have complied with the provisions of this section if at least one meeting of the Board of Directors has been conducted in each half of a calendar year and the gap between the two meetings is not less than ninety days:
So that summarises the concept of Small Company. So effectively Small Companies get to hold two less Board meetings during the year and a Single Director can sign the annual return and they need not produce the Cash Flow statement. Other than that I did not find any mention of Small Company in the Companies Act, 2013. They still have to maintain statutory registers, minutes Books, books of account, common seal, hold an annual general meeting, have a registered office, have minimum of two directors and two shareholders.
So whether it was a wise move on the part of the Ministry of Corporate Affairs to carve out a definition of Small Company with so little exemptions provided to them under the Companies act, 2013.